Dairy Talk

Cheap(er) Corn Means Cheap(er) Milk

Start thinking about 2014 risk management scenarios now. Once the corn crop is in the bin, it will be too late.

If you were following ProFarmer’s 2013 Crop Tour across the Corn Belt last week, you know that corn yields are projecting far better than last year’s drought-shriveled disaster.

From Ohio to Nebraska, yields were sometimes 50 bu. per acre better than last year, and anywhere from 5% to 35% better than the three-year average. Granted, 2012 was included in that three-year average, but no state on this year’s tour was averaging less than 155 bu. per acre projected yield.

My windshield surveys of both Minnesota and Wisconsin over the last 10 days suggest similarly good yields here in the Upper Midwest. Sure, there are pockets of drought-stressed, leaf-curled corn on lighter, sandier soils. And a dearth of rain across most of the Midwest this month means that the crop is not yet made.

But given our modern, high-powered hybrids, increased corn plantings of 224,000 acres (0.2%) and far better moisture than last year, it’s a pretty safe bet that more corn is on its way to a silver-steeled, corrugated bin near you. To state the obvious, that’s welcome news after years of $6 corn.

But more, cheaper corn likely means more, cheaper milk. For 2014, USDA is predicting U.S. dairy cows will pump out 204.5 billion pounds, up 1.2% over this year.

"I think the increase could easily be twice that large," says Jerry Dryer, editor of Dairy & Food Market Analyst newsletter and Dairy Today’s Market Watch Diary contributor. "If corn and bean crops are as large as currently forecast, the milk supply will surge, fueled by the lower feed prices and vastly improved margins-over-feed costs."

Granted, year-to-date milk is up a paltry 93 million pounds (0.07%) over last year. But any increases brought on by cheaper feed will only add to already plentiful warehoused product. "Inventories are atypically high, with butter stocks to the point of being ridiculous," says Dryer.

Lackluster fluid milk sales—June fluid sales were down a disturbing 6% from a year ago-- aren’t helping the cause. But schools have or will start soon, which should bolster fall milk sales.

In any event, futures markets are already anticipating more milk. Last week, 2014 Class III contracts struggled to climb above $17. Still, depending on your basis, that could mean mailbox prices of $18 to $19 next year. But that’s at current conditions—both on the supply and demand side. If Jerry Dryer is right and we see a 2.5% surge in production, it’s likely even these prices won’t hold.

This is a long way to saying that you need to be thinking 2014 risk management scenarios now. When the corn crop is in the bin, it will be too late.

If you don’t want to lock in futures or over-the-counter contracts with your milk handler, at least consider put options or fence strategies to protect your milk price. At the very least, talk to your broker to discuss options. Do it this week. December will be too late.